Entries in Picard
(25)

In a severe blow to the quest to recover funds for the benefit of victims of Bernard Madoff's $50 billion Ponzi scheme, a New York federal judge threw out $20 billion of common law claims that the court-appointed trustee had asserted against banking giants JP Morgan Chase & Co. ("JP Morgan") and UBS AG ("UBS"). In granting the motions to dismiss previously filed by JP Morgan and UBS, United States District Judge Colleen McMahon ruled that court-appointed trustee Irving Picard lacked standing to assert common-law claims, including allegations of aiding and abetting fraud and breach of fiduciary duty, on behalf of victims of Madoff's fraud.

To put the magnitude of the dismissal in context, the $20 billion in dismissed claims, combined with the $9 billion dismissal of claims by Judge Rakoff against HSBC in late-July, is over three times the amount of funds recovered thus far by Picard and his legal team and nearly double the amount of principal estimated lost by Madoff victims. Picard estimated that he has recovered approximately $8.6 billion to date out of approximately $17 billion in valid customer claims.

In the decision, Judge McMahon echoed Judge Rakoff's reasoning in his dismissal of common-law claims against HSBC that Picard lacked the standing, and was thus legally prevented from bringing claims, to sue on behalf of former customers of Madoff's brokerage firm Bernard L. Madoff Investment Services ("BLMIS"). Thus, Picard can only assert claims in his capacity as trustee of the bankruptcy estate of BLMIS. Rationalizing her decision, Judge McMahon stated that:

giving the Trustee the power to pursue claims on behalf of creditors would usurp the creditors' right to determine whether and in what forum to vindicate their legal injuries.

In an interesting analogy, Judge McMahon drew parallels between Picard's attempt to sue Madoff for damages on behalf of his victims to the situation of a parking garage owner attempting to assert claims on behalf of a car that suffered damage while in traffic and before it entered the garage. Like Picard, she stated, the garage would have no legal standing to pursue recovery for the injury sustained before the car entered the garage.

Picard will most likely appeal Judge McMahon's decision to the Second Circuit Court of Appeals simply due to the amount potentially at stake. He has already declared his intention to seek review of Judge Rakoff's July decision dismissing similar claims against HSBC.

Assuming that Picard does not succeed with his planned appeal, the dismissal of common-law claims leaves the only remaining avenue of recovery against JP Morgan and UBS in federal bankruptcy claims, of which $425 million is sought from JP Morgan and $1 billion from UBS. Because the remaining claims solely concern issues of bankruptcy law, they will be transferred back to federal bankruptcy court before United States Bankruptcy Judge Burton R. Lifland.

A Bankruptcy Court Judge issued a strongly-worded order holding that a lawsuit recently filed in the Cayman Islands against the Madoff trustee was void and could not proceed any further. Irving Picard, the court-appointed trustee for Bernard L. Madoff Investment Securities ("BLMIS"), sued Maxam Absolute Return Fund, Ltd ("Maxam"), seeking the return of nearly $100 million in fraudulent transfers made in the six years preceding the bankruptcy filing of BLMIS. After answering that complaint, Maxam then filed an action in the Cayman Islands (the "Cayman Action") seeking a declaration that Maxam was not liable for the transfers. According to Judge Lifland, that action is forbidden by the Bankruptcy Code and other federal laws, and constitutes a "clear attack on this Court’s exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination."

While such an action would normally be allowed, the act of filing for bankruptcy triggered provisions in the Bankruptcy Code that forbid actions by third parties to recover or obtain assets in the bankruptcy estate. Specifically, section 362 of the Bankruptcy Code contains what is known as an "automatic stay" provision that forbids:

the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor,” or “any act to obtain possession of . . . or to exercise control over property of the estate.

Additionally, BLMIS's membership in the Securities Investor Protection Corporation ("SIPC") resulted in the bankruptcy being subject to the provision of the Securities Investor Protection Act, which contains similar prohibitions. In the Cayman Action, Maxam sought

a declaration that Maxam Limited is not liable to the Trustee for either the $25 million Maxam Limited received from Maxam Fund within the period of 90 days prior to the Filing Date or any amounts in excess of the $25 million that Maxam Limited received from Maxam Fund within the period of two years prior to December 11, 2008.

However, according to Judge Lifland, the Bankruptcy Code and SIPA prevent such an action from continuing. Noting that Picard would be forced to essentially relitigate the merits of the clawback lawsuit, Judge Lifland opined that unneeded time, expenses and resources would be expended. Additionally, the suit interferes with the Bankruptcy Court's exclusive jurisdiction over the property of Madoff's brokerage firm. Finally, Judge Lifland also noted that the suit violated the Barton Doctrine, which is a judge-created rule that before a court-appointed receiver or trustee can be sued, the petitioning party must first seek leave of the court.

Under Section 105 of the Bankruptcy Code, a Bankruptcy Court is granted equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code].” Noting the ramifications should each foreign individual or entity sued by Picard be permitted to seek relief in their own country, Judge Lifland utilized these powers by issuing an injunction preventing Maxam from continuing the Cayman Action.

The trustee overseeing the liquidation of Bernard Madoff's defunct brokerage firm continued his quest to recover funds from investors of Madoff's largest feeder fund, filing five lawsuits seeking over $200 million from five entities. Irving Picard, the court-appointed trustee, is seeking over $1 billion from entities who invested with Madoff through Fairfield Sentry. Picard reached a settlement with Fairfield Sentry earlier this year that allowed him to pursue clawback claims against Fairfield customers. Fairfield received over $3 billion during its relationship with Madoff, $1.6 billion of which was subsequently transferred to Fairfield customers. Picard has now filed suits seeking over $1 billion of the $1.6 billion allegedly transferred from Fairfield to investors.

Today's suits seek the return of funds from ABN AMRO Bank, Bank Luxembourg, Lighthouse Investment Partners, Nomura International PLC, and KBC Investments Limited. In total, the latest round of suits seeks nearly $220 million consisting of the following amounts from each entity:

ABN AMRO Bank - $25,469,129

Bank Luxembourg - $50,082,651

Lighthouse Investment Partners - $11,165,251

Nomura International PLC - $21,449,920

KBC Investments Limited - $110,000,000

These clawback actions derive their authority from various federal and state laws. Under Sections 550 and 551 of the Bankruptcy Code and various sections of the New York Debtor & Creditor Law, initial and subsequent transfers from a debtor within the six-year time period preceding the filing of a bankruptcy petition are subject to avoidance.

Victims of Bernard Madoff's massive Ponzi scheme are set to receive their first distribution of funds recovered in the wake of the fraud on Wednesday, five days after the initial distribution date was delayed. Irving Picard, the court-appointed trustee, had originally intended to make the distribution by September 30th to investors holding claims as of September 15th. However, the distribution was delayed after a federal judge dismissed most of Picard's claims against several owners of the New York Mets last week. Along with the dismissal of nearly all of Picard's claims, United States District Judge Jed S. Rakoff also made several rulings that could potentially threaten the magnitude of any future recoveries in the approximately 1,000 cases filed by Picard thus far. Ponzitracker covered Judge Rakoff's ruling in greater detail here. In a statement late last week, Picard announced that out of an abundance of caution, his legal team was delaying the scheduled distribution to evaluate the impact of the rulings.

The majority of lawsuits filed by Picard have sought to "claw back" false profits from investors who withdrew more funds than they invested with Madoff. Based partly in equity, this procedure seeks to pool all recovered funds and make pro rata distributions to all investors, rather than allowing some investors, usually those that were able to invest in the scheme earlier on, to keep their profits while ignoring others who had invested later and had not received as many purported interest payments to offset their principal investment losses. Because of the duration of Madoff's scheme, which Picard argues spanned several decades, thousands of investors had accounts with Madoff. Some who were fortunate to invest in the early days of the scheme have since recouped their original investment by many times. Picard's largest single recovery to date comes from the estate of one of these early investors, Jeffrey Picower, who agreed to return over $7 billion of false profits received during his relationship with Madoff.

In the ruling last week, Judge Rakoff dismissed nearly all of Picard's claims asserted against several principals of the New York Mets. Picard had taken the rare step of not only asking for any false profits, but also for the return of the original principal investment, arguing that the mens' close relationship with Madoff and investing knowledge should have alerted them to the fraud. Judge Rakoff's ruling severely limited Picard's reach, holding that a "Safe harbor" provision in the U.S. Bankruptcy Code forbade Picard from seeking any false profits received over two years from the date Madoff's brokerage filed for bankruptcy. This safe harbor provision restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents the interplay between bankruptcy and securities law. While Picard had argued that the "safe harbor" provision did not apply, Judge Rakoff held otherwise.

In his statement issued today, Picard stated that additional settlements had allowed him to increase the amount of the initial distribution from $272 million to $312 million. This distribution would account for roughly 4.6% of allowed investor losses. Picard also stated that the total funds recovered for victims thus far had increased to $8.694 billion - approximately 50% of the $17.3 billion amount Picard had estimated was lost by Madoff's victims. Of the nearly $2.4 billion available for distribution, most remains tied up by pending litigation.

Investors with allowed claims have also received over $700 million in total cash advances from the Securities Investor Protection Corporation ("SIPC"), a federally-mandated non-profit that protects investors if a broker-dealer fails. Nearly all broker-dealers registered with the Securities and Exchange Commission are members of SIPC. Under SIPC guidelines, investors holding securities or cash in accounts of failed broker-dealers are entitled to receive up to $500,000 in cash advances to cover their losses.

Irving Picard, the trustee appointed to liquidate the now-defunct brokerage firm of convicted Ponzi schemer Bernard Madoff, was dealt yet another significant setback in his quest to collect funds for distribution to Madoff's defrauded investors. On Tuesday, a federal judge rejected many of the claims in Picard's ongoing suit seeking $1 billion from owners of the New York Mets baseball team. In addition to the dismissal of nearly all claims, United States District Judge Jed S. Rakoff narrowed the standard under which Picard could proceed in the case going forward. Additionally, in the wake of the ruling, which many observers warned could severely limit Picard's potential recovery in the nearly 1,000 cases he has filed against those who withdrew more than they invested with Madoff, a lawyer for Picard stated that the first interim payment scheduled to be distributed to investors this month could likely be delayed.

In his suit, Picard had sought nearly $1 billion from various executives of the New York Mets baseball club, consisting of $300 million in principal investment and $700 million in so-called false profits. Consistent with the nearly 1,000 cases filed to date by Picard, the majority of which are the "clawback" actions, Picard has sought the return of funds withdrawn by the aptly-named net-winners within the six years prior to the filing date of the Madoff bankruptcy. While federal bankruptcy laws only permit this lookback to seek funds withdrawn up to two years before the bankruptcy filing date, Picard has relied on the interplay between federal and state bankruptcy laws, which often permit a longer lookback period. Section 544(b) of the Bankruptcy Code defines this interplay, stating that the applicable state law can also be considered in expanding this lookback period. Under section 213(8) of the New York Debtor and Creditor Law, fraudulent transfers can be avoided if they occurred within six years of the bankruptcy filing.

Under most bankruptcies and receiverships that parallel bankruptcy law, the use of state law to enlarge the applicable lookback period is routinely used and rarely challenged. However, Judge Rakoff relies on the "safe harbor" provision codified in section 546(e) of the Bankruptcy Code that comes into play in the case of a registered securities brokerage firm and securities contracts. This safe harbor restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents "the intersection of two important national legislative policies on a collision course - the policies of bankruptcy and securities law." In re Enron Creditors Recovery Corp., 2011 WL 2536101, *5 (2d Cir. June 28, 2011). Section 546(e) covers an extremely broad definition of "settlement payments", which Judge Rakoff likens to a transfer made in connection with a securities contract, and "clearly includes all payments made by Madoff Securities to its customers." Thus, by its "literal language," the Bankruptcy Code prohibits Picard from bringing any clawback action against Madoff customers except those paid in the case of actual fraud.

Understandably, Picard argued that section 546(e) was inapplicable in the present situation, since its application would be inconsistent with the statute's purpose. However, Judge Rakoff cites the purpose of section 546(e) in seeking to "minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." Here, Judge Rakoff relies on Picard's own characterization of the extent of Madoff's fraud in theorizing that the undoing of the transfers involving nearly 5,000 Madoff customers would have a substantial and similarly negative effect on the financial markets.

However, it is the disparity between the current situation and the context in which that reasoning was previously invoked, the Enron fraud, that may serve as ammunition for the trustee's appeal. Whereas Enron involved publicly traded shares of stock, which play a direct role in the interplay of the financial markets, Madoff customers invested in a private brokerage firm that was neither publicly traded nor a prominent market participant. The unwinding of transfers to potentially millions of Enron shareholders would have involved a complicated intertwining of numerous market participants. Some will argue that the sheer volume of Madoff's purported trading qualifies it as a major participant in financial markets, but that purported trading, according to the trustee's extensive analysis of Madoff's business records, was as fictitious as the returns supposedly being generated. But Judge Rakoff also bolsters his opinion using the constitutional principles of checks and balance by stating that, regardless of the legislative history, the judicial branch must only interpret what Congress has said, and may not deviate from what Congress clearly states.

The decision, arguably the most important legal decision in recent memory by Judge Rakoff, has immediate and severe ramifications for Picard. Just as seen in the wake of Judge Rakoff's decision dismissing common law claims against HSBC, after which a plethora of 'piggback' motions were filed by similarly-situated financial institutions, one can expect the targets of Picard's current clawback suits to file motions on a much larger scale seeking the limiting of Picard's reach. This limiting would be significant, in that it would effectively permit Picard to only seek funds withdrawn from Madoff in the two, rather than six, years prior to the unraveling of the scheme. While many have struggled to estimate the true scope of these two scenarios, a lawyer for Picard estimated that up to $6 billion could be off the table if the ruling is upheld. As noted by Allison Frankel in her excellent column, some high-profile beneficiaries of such a scenario would include Madoff's children, whose liability would decrease by $83.3 million, Bank Medici founder Sonja Kohn, whose clawback exposure would decrease by $27 million, and Frank Avellino and Michael Bienes, several principals behind a large feeder firm to Madoff, whose clawback liability would decrease by nearly $40 million.

Under an order issued the following day by Judge Rakoff, the decision cuts the possible liability of the Wilpons from nearly $1 billion to $386 million, the total of all transfers made during the two-year period prior to the filing of the bankruptcy petition.

The ruling also affects the scheduled interim first distribution to victims scheduled to occur by the end of September. According to Diana B. Henriques of the New York Times, who has authored a book on Madoff, an attorney for Picard stated that the initial distribution to victims would likely be delayed until the trustee has had an opportunity to determine the impact of the ruling on amounts owed to other victims of the fraud. Victims were scheduled to share a pro rata portion of the first payment, which totaled $272 million.

An attorney for Picard has already sought permission from Judge Rakoff to allow expedited review of the decision by the Second Circuit Court of Appeals.